Posted At : September 23, 2009 3:16 PM
Although all seems normal once again, it’s just not possible that entire generation’s excesses have been cured in 7 months. When you come through a 25-year secular credit expansion, it is not going to take months or a quarter. It will take years to bring levels of outstanding credit into realignment with the country’s debt-servicing capacity. We are really in this deleveraging process. It is inescapable.
The massive deleveraging is destroying assets faster than the government can inflate. This will make deflation enemy #1. Due to deflation and the widespread excess capacity, both in the labor market and the product market, the only way that corporate profits are rebounding are through aggressive cost-cutting. These measures ultimately come at a cost of lower employment or fewer hours worked, and that feeds right into a listless consumer spending environment that’s only really propped up periodically through the generosity of Uncle Sam. It is one thing to have deflation when it comes from an innovation that sparks productivity. However, when you get deflation that is principally driven by deficient demand, that’s different altogether.
When you look at the labor market, the 55-and-up age group is the only one that has posted any job growth in the past year. They aren’t coming back into the workforce because they want to. They are doing it because they have to. They need the income to make up for the record amount of lost net worth that they endured. From a life-expectancy table, they can see if they made it to 52, they are probably going to make it to 82. They aren’t going to make up for all that lost wealth, but there is this growing realization that the boomers are going to have to prepare for retirement the old-fashioned way — by putting more of their income into the coffee can, as opposed to buying more coffee cans, or shoes, BMW’s and vacation homes.
It’s crucial to understand that secular bull and bear markets move in 18-25 year cycles, and to understand that today, we are really only halfway into the secular bear market.
In a secular bull market, corrections are opportunities to build your long-term positions at better prices, as was the case with the crash of October 1987. In a secular bear, market rallies are to be rented, not owned.
Regards – Keith Springer, author of Facing Goliath